Maintaining balance between growth and inflation, emphasizing the quality of life and happiness of citizens, improving the environment and living conditions and protecting intellectual property. What does the new China Five Year Plan have in store?

The new China Five Year Plan has recently been published, and greater emphasis has been placed on elements other than economic growth: The well being of citizens, improving environmental conditions and making people happier all comprise what seems to be one of the most challenging and ambitious five year plans yet.

The problems with which China is dealing are intricate and the challenges are enormous: Rising inflation and economic inequality are at the top of the list, yet issues such as environment treatment and the shift from a manufacturing based economy to a more consumer based economy are also essential and critical. In hopes of better understanding the direction in the new China Five Year Plan, Laowaiblog caught up with Michal Meidan, an Asia practice analyst in Eurasia Group, the world’s leading global political risk research and consulting firm.

The world is entering a new era in which China is playing a much more important role, specifically in global affairs. Do you feel that China should demonstrate stronger leadership skills in world-wide affairs? (like The United States, for example)

China is becoming more involved in countries around the world, in investments, in trade flows and in financial markets, but whether it should play a stronger political role may not be the right question, since in the coming years (2-3 at the very least), it is unlikely to play any kind of role comparable to that of the United States—politically, it doesn’t want to, and, strategically, it doesn’t have the military capabilities to do so. China’s involvement globally is an outcome of its domestic agenda and policies (SOEs going global, foreign exchange reserve reduction and diversification, the need for imports of commodities and raw materials) and will continue to be an extension of domestic policies for years to come. Since this situation is informed by a growing number of actors, it is constrained by the need to reach a consensus between their different interests. Chinese involvement beyond its borders will continue to expand, but two main features are likely to figure prominently: first, China will shy away from many of its global responsibilities as the US sees them (especially taking a political stance in international hotspots and supporting sanctions regimes in the UN; it will be reluctant to intervene militarily outside its borders, and while China wants a bigger say in the international financial system, it seems unlikely that the RMB will replace the dollar any time soon); second, where it will become more assertive in pursuing its interests, Beijing will seek its own narrow interests, and as China’s financial and strategic clout grows, the US will need to work harder for Chinese support of ostensibly shared objectives. What are these narrow interests and will they change? For now, Beijing pursues commercial interests and a pragmatic foreign policy to accommodate them, and even though these interests are evolving, a shift to a more ideological or a more value-based foreign policy is still a distant prospect.

The balance between growth and inflation will be the main struggle for leadership in the coming year, but Beijing will remain pro-growth on the whole, while trying to contain inflationary pressure. As inflation keeps rising, Beijing is using a wide array of tools in order to try and tame the “inflation tiger”, as Wen Jiabao called it. This will include increasing interest rates, reserve requirements and sustained currency appreciation but also restrictions on price hikes, a slower pace of energy price liberalization and subsidies to protect the more vulnerable households. For now, the government seems content that this is enough and seems convinced that inflation will subside in the second half of the year. If this is not the case, then the government may have to step on the brakes more forcefully and sacrifice some of its growth momentum.

In the China Five Year Plan, great deal of emphasis is placed on raising people’s quality of life. Do you think that given the on growing social gap between the rich and the poor in China and given the environmental problems with which China is dealing that raising the quality of life is possible?

There is, as you note, a real emphasis on quality of life in the 12th FYP and a notable shift from emphasizing growth to development, and even happiness. Many in China are now talking about a happiness index, including prominent economist Hu Angang, and they include in this index not only rising incomes but also welfare, environmental sustainability, personal safety and governance.

On the whole, Beijing will make real progress in raising household incomes over the next five years. There is a real political will (and economic and political necessity) behind boosting incomes and domestic consumption but this will be the work of a decade or more and will remain a major theme of subsequent FYPs. The government aims to raise household incomes in various ways and will look to: 1) ensure steady pay increases, expand social welfare coverage and find new fiscal revenue streams to support this spending; 2) encourage growth in labor-intensive industries; 3) increase rural residents’ ability to earn income through agricultural and education reform, and 4) raise production and investment costs, especially for state-owned firms and wealthy households.

While it’s easier for Beijing to accomplish the first three, concerns about the political and social effects of lower profits and job loss, especially in China’s powerful state sector, will constrain progress, and pro-business bureaucrats and local officials will further inhibit aggressive reform moves. So on balance, households will earn more, have slightly better social safety nets, and probably spend more, even if the Chinese economy will still remain heavily dependent on corporate and government investments.

As for sustainability, in the new China Five Year Plan it is evident that environmental concerns are taken very seriously, and since reaching its Copenhagen commitments (reducing carbon intensity per unit of GDP by 40-45% by 2020) will allow it to make gains in its industrial policy, Beijing is likely to make significant headway in reaching its goals and improving the environment. Of course, there’s a huge different between environmental awareness in Beijing, Shanghai and Fujian and Guizhou and Xinjiang, and not all of China’s provinces will tackle environmental issues with the same vigor. But, overall, skies in China are likely to become less grey over the coming years since there is a real economic, political and social cost to environmental degradation.

Despite of that, there is a long way to go until scoring highly on a happiness index, and it all depends on implementation. Can Beijing change the way local officials think about growth? It probably can, but not as quickly or as fundamentally as it would like to do. Changes in governance and government accountability will probably remain the most difficult parts of the equation, but if the government delivers on economic and environmental goals, and pursues some modest tweaks to government accountability, it might be able to score not too badly on a happiness index.

The 12th China Five Year Plan also emphasized the need of China to move from a manufacturing type of economy to a more consumer type of economy. It also emphasizes education, and specifically innovation and creativity that are necessary to support China as it further develops. Do you think that China is capable of making that adjustment? How do you see the Chinese people being more creative and innovative when intellectual property rights are not protected and when access to information and knowledge is limited?

The push for access to knowledge and IP protection will gradually come from Chinese scientists (some of those working on the seven emerging industries for example or other high-tech industries that require knowledge, access to information and to foreign cooperation) and from Chinese companies who begin spending and investing more seriously in higher value added goods. This process can take time but will probably start happening when there is a strong enough constituency within China to promote it. The main obstacle, as you point out, is skilled workers and scientists – some will probably come back from overseas as the Chinese market becomes more attractive, and China has a ten year program for cultivating talent, but whether it can actually achieve these goals without relying heavily on foreign partnerships and foreign technologies remains to be seen and depends also on the progress of reform in the education system.